The Federal Reserve sent a mixed message on August 1 when it wrapped up its Federal Open Market Committee (FOMC) meeting.Much to everyone’s surprise, the committee did not announce QE3, an effort to lower borrowing costs through bond purchases.
However, it did add an interesting sentence in its FOMC statement:
The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labour market conditions in a context of price stability.
Eric Green of TD Securities and a number of other economists noticed it and noted that this was Greenspan-era speak. Basically, it suggested that the Fed might announce new easy monetary policy in between FOMC meetings.
However, Morgan Stanley Chief U.S. Economist Vincent Reinhart isn’t betting on it. From his new note to clients:
The Fed told us that it would “closely monitor” the situation. But the Fed has already gotten by the first of two major domestic risk events before its September meeting, the July employment report. We think August payrolls come out too close to the September meeting to trigger action. If the Fed does move before that meeting, it will owe to an incoming phone call. Either Mario Draghi will want company in quantitative easing or Timothy Geithner will want to roll out a “funding for lending” scheme. Both are doubtful prospects, which is why we put the probability of an inter-meeting move at about 5%. That, by the way, is the same probability as the current Intrade quote for the contract that delivers if NASA finds extraterrestrial life by year-end.
Much more likely, but still less chance than predicting the flip of a fair coin, is a move in September. In the MS Economics forecast, data will modestly disappoint and financial conditions tighten somewhat. The Fed has the opportunity to add another year to its Summary of Economic Projections and to stretch out to 2015 its commitment to keep rates low.
In the same note, Reinhart cut his U.S. GDP forecast for 2012 and 2013:
We now see GDP growth over the four quarters of 2012 at +1.6% versus the +2.0% estimate that we published in June. We continue to have growth running at +1.7% on a Q4/Q4 basis in 2013.
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